Housebuilder Persimmon (LSE: PSN) is a FTSE 100 share that presents a fair share of risk to investors. Yet it’s a UK dividend share I’m still considering buying right now.
I don’t believe interest rate hikes from the Bank of England will hammer housebuilders’ profits. It’s been suggested that monetary tightening could hit mortgage affordability hard. I actually expect homes demand to continue outpacing supply, keeping demand for new-build properties on the rise.
I am concerned, however, about the impact of rising costs on Persimmon and its peers’ profits. Ratings agency S&P Global said on Wednesday that “escalating fuel, energy and commodity prices [has] led to the fastest rise in costs for six months”.
It seems like more cost-related trouble could be coming down the pipe too, as the war in Ukraine continues and supply chain disruption persists.
Why I’d buy this FTSE 100 stock
Still, it’s my opinion that the benefits of owning housebuilding shares like Persimmon outweigh this risk.
Home price inflation has continued outpacing the rate at which costs have been rising for the UK builders. I expect this to remain the case too as historically-low interest rates and ongoing support for first-time buyers from the government keeps driving house demand (and thus property prices) higher.
Besides, I think that Persimmon’s ultra-low share price reflects the danger that rising costs pose to profits forecasts. Today, the FTSE 100 firm trades on a forward P/E ratio of just 9 times. This is comfortably inside the widely-accepted bargain benchmark of 10 times and under.
It’s also worth noting Persimmon’s resilient profit margins in the face of increasing costs. Rising costs are nothing new for housebuilders, yet Persimmon grew its underlying operating margin to 28% in 2021. That was up from 27.6% in the prior period and is the best in the industry.
10%-plus dividend yield!
I’d also be prepared to accept the risk given the size of Persimmon’s dividend yield. For 2022, this sits at an enormous 10.4%.
Okay, dividend cover at Persimmon isn’t the best. The predicted dividend is covered just 1 time by anticipated earnings. This is below the safety benchmark of 2 times and above and, theoretically, could put those dividend estimates in danger if profits miss.
However, Persimmon’s rock-solid balance sheet means it could have the means to meet City expectations even if earnings come in below par. The builder also had £1.24bn worth of cash on its balance sheet as of December.
A UK share I’d hold to 2032
I don’t just think Persimmon is a great investment for today. Britain needs to undergo a housing revolution over the next decade to meet the needs of a growing population.
The government is seeking to create 300,000 new homes a year. And companies like Persimmon will play a critical role in helping meet this target. I think this FTSE 100 share could help investors like me make massive returns all the way through to 2032.